An Analysis of Strategic Equity Stakes Acquisition of Chinese Banks by Foreign Financial Institutions

• Published in: Emerging markets finance & trade Vol. 49; no. sup3; pp. 98 - 109
• Main Authors: Chang, Hui-Lung, Wu, Sou-Shan, Liao, Szu-Lang
• Format: Journal Article
• Language: English
• Published: Abingdon Routledge 01.07.2013; M.E. Sharpe, Inc; Taylor & Francis Ltd
• Subjects: Bank acquisitions & mergers; capital control; contingent claim; Equity; Equity stake; Financial institutions; International banking; optimal acquisition equity stake ratio; Portfolio diversification; Rates of return; risk-weighted asset; Shareholders wealth; Studies; China
• ISSN: 1540-496X; 1558-0938
• DOI: 10.2753/REE1540-496X4904S307

This paper applies a contingent claim model to examine the risk of and returns to foreign financial institutions after they acquire equity stakes in a Chinese bank. The model considers dynamic factors such as individual asset value and exchange rates in maximizing shareholder value. In addition to analyzing the asset value and factors associated with risk after participation, this paper evaluates the optimal acquisition equity stake ratio using numerical analyses under regulatory capital control. For the Chinese banking sector, we discover that the portfolio risk of foreign financial institution will decrease after acquiring equity stakes when its asset increases, the debt ratio decreases, and the required risk-weighted asset increases. Overall, these foreign financial institutions have well-diversified currency portfolios and enjoy better asset quality and surplus earnings; therefore, they will likely increase their optimal acquisition equity stake ratio if the Chinese banks in which they invest have with good quality assets and are focused on local business.